Pension

Employees are looking for guidance in regard to their 401(k) Plan. This study confirms the need to offer professional managed portfolios. In addition the portfolios should range in risk level from aggressive to conservative. When each employee chooses their risk level the accumulated plan will represent a pension plan. Ideally your plan will only include these professionally managed portfolios. With the guidance of an investor coach your employees will experience improved results and less anxiety.
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Eighty-three percent of Americans report favorable views of pensions, and 82% say those with pensions are more likely to have a secure retirement, according to a research report, “Pensions and Retirement Security 2013: A Roadmap for Policy Makers,” issued by the National Institute on Retirement Security (NIRS). In addition, 84% of survey respondents say all Americans should have access to a pension to be self-sufficient in retirement.

Support was strong from both men and women (83% and 82%, respectively). Pensions may also play a factor in choosing an employer—if considering a new job, Americans report being nearly twice as likely to pick an employer with a pension than one with a 401(k) plan.

Eighty-seven percent of Americans polled contend that policymakers do not understand how hard it is to save for retirement. Millennials are highly dissatisfied, at 94%. Three-fourths of Americans say a new type of pension plan described in the survey is a good idea. More than 90% would favor a new pension plan that is available to all Americans, is portable from job to job and provides a monthly check throughout retirement for those who contribute.

Even though retirement is in the distant future, virtually all Millennials agree that the retirement system is under stress and needs repair (95%), and that lawmakers need to make retirement a higher priority (90%). They also believe that those with pensions will have a more secure retirement (89%) than those without, and 94% say the lack of pensions for Baby Boomers is creating stress for families and the economy. Millennials are especially supportive of a new pension system (84%), with 88% saying they would consider participating.

The ideal retirement plan will provide professionally managed portfolios only. By providing this type of plan your employees and yourself will realize improved results and less investment anxiety. This combined with investor coaching will result in a more pension fund like plan.
Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor (Photo credit: Wikipedia)

How important is choice in your 401(k) options? Do you want to have a set of 10 or 20 mutual funds and investments from which you get to choose your retirement portfolio allocation?There’s a concept gaining momentum in the retirement planning sphere that reduces 401(k) investor choice. This old, revitalized idea is the managed portfolio.

Simply, it’s a portfolio comprised of several investments managed by someone else. The idea is that an expert is changing your retirement investments, as needed, when economic tides call for a reallocation. All you have to do is contribute money, and it’s managed for you.

The industry may be looking at this model because, statistically speaking, investors don’t fare as well on their own; the average 401(k) investor will benefit, in the long-term, from using expert advice in one form or another. Still, some investors enjoy spending time researching their investment options and setting their own allocation. These people may not react favorably to a 401(k) plan that eliminates their ability to self-manage.

Some employers already offer 401(k) managed portfolios, but current incarnations generally allow employees to choose whether to use the option. If you lost the option to select your own investments, would it bother you? It’s unclear whether self-management could ever be edged out.

I have to be honest. I like the idea of managed portfolios. But–and this is extremely important–it must be done well. A good managed portfolio 401(k) plan must:

–Have well-managed underlying investments. It requires good mutual funds that have performed well through market ups and downs relative to their peers in the same asset class, and a fund manager has been with the fund through these ups and downs and has managed the fund in accordance with the parameters of its prospectus.

–Only offer portfolios that are diversified across several asset classes. Retirement investors need to protect their nest eggs with investments that span multiple asset classes so that, when one class experiences volatility, the retirement portfolio can glean stability from the other asset classes.

–Offer several portfolios in order to provide appropriate options for all employees.

–Help employees to select the appropriate managed portfolio based on the individual investor’s risk tolerance, timeline to retirement, retirement goals and personal preferences. This shouldn’t be a guessing situation. Your employer or the financial services company providing the portfolios should provide a questionnaire that helps you pinpoint the appropriate portfolio for your current needs.

Those who plan ahead and save for retirement will be the true winners. These individuals are relying on themselves for their own financial security rather than on the federal government. There are three simple rules to saving for retirement own equities…globally diversify….rebalance.
retirement (Photo credit: 401(K) 2013)

Half of American workers have no retirement plans through their jobs, leaving people on their own to save for old age.Meanwhile, four out of five private-sector workers with retirement plans at work have only 401(k)-type defined contribution accounts, rather than traditional pensions that pay retirees a fixed benefit for life. Numerous studies have found that workers with defined-contribution accounts often put aside too little money, make too many withdrawals or employ the wrong investment strategies to save enough for old age. Overall, people ages 55 to 64 have a median retirement account balance of $120,000, Boston College researchers have found, which is enough to fund an annuity paying about $575 a month, far short of what they will need.

Officials at money-management firms that handle 401(k)-type investments argue that the tools are in place for Americans to retire comfortably. The problem, they say, is that employers and workers are not using them correctly.

When Americans start to realize that they are responsible for their own retirement they may take their retirement plan more seriously. 401(k) plans were designed as a supplement to a pension plan. This is no longer the case. For most Americans the 401(k) plan has become their sole source of retirement.

Please comment or call to discuss how this affects you and your financial future.

The Wall Street bullies make money when money moves. Therefore these bullies have a vested interest in keeping you trading. Consequently 401(k) plans have been sold with many options to facilitate trading. By providing a more pension fund like plan employers will reduce employee anxiety and improve results.
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Investment Options and 401(k) PlansIyengar found the same phenomenon applies to investing in retirement plans. Many people don’t participate in their company 401(k) plans. She conducted a study and concluded that once variables like age, income and company were controlled, the biggest reason for a decline in 401(k) enrollment was the over-abundance of choices.

When a 401(k) plan offered only two investment options, 75% of employees participated. When 59 investment options were available, however, the participation rate dropped to 61%.

Expanding on this study, Iyengar examined the impact that more investment options had on the 401(k) participants’ asset allocation. For every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. Some neglected equities altogether.

This is significant because stocks usually generate better returns than bonds or cash over long periods. Lower equity allocations can be the difference between a well-funded retirement and a 401(k) plan that comes up short.

How to Combat Choice Overload

One of the easiest ways for companies to combat choice overload is to avoid offering too many different options. Procter & Gamble increased sales of Head & Shoulders shampoo by 10% when it reduced the number varieties available from 26 to 15

The best alternative for employers is to offer a more pension fund like plan to their employees. By providing an age appropriate portfolio you will not only improve participation but also improve results.

Please comment or call to discuss how this affects you and your investments.

Employees are beginning to realize they cannot rely on public pension plans for retirement security. The 401(k) plan must become more of a pension fund like plan. The less decisions the employee has to make the greater the success. Remember your portfolio si like a bar of soap the more you touch it the smaller it gets.

“Employers understand that financial wellness is more than what workers are doing today in terms of savings in their retirement programs—that it’s evaluating whether their long-term investment strategies are positioning them to be ready when it comes time to retire, and whether other priorities are getting in the way,” said Patti Balthazor Björk, director of Retirement Research at Aon Hewitt. “Helping workers get an accurate picture of their future needs and whether they are on track to meet those needs, and helping them create a roadmap for achieving those goals is paramount.”To help workers reach their retirement goals, employers continue to offer and promote the use of investment advisory tools. More than three-quarters (76 percent) currently offer target-date funds as a way to provide workers with a simple and straightforward approach to investing. Of those who do not offer target-date funds, 35 percent will likely add this option in 2013. Managed accounts and online third-party investment advisory services also continue to gain popularity (64 percent), up from just 40 percent in 2012.

“To ensure that a worker’s investment risk exposure appropriately matches their needs given their age and other factors, it is critical that 401k investors periodically rebalance their portfolios. However, we know that most rarely, if ever, do so because they are overwhelmed or unsure about their investment choices,” explained Björk. “Features like target-date funds and managed accounts take some of the guess work out of investing, which can help workers stay on track with their savings goals.”

Employers are beginning to realize that their employees need help in reaching their long term financial goals. The 401(k) plan has become the sole source of retirement for most Americans. The need for a more pension fund like plan has never been greater than now.

Please comment or call to discuss how this affects you and your employees.

Younger employees may benefit from watching the over spending baby boomer generation struggle with their finances. The boomers over spending and debt is prevednting many from retiring at 65. The younger generation realizes that they and they alone are responsible for their own financial future.
retirement (Photo credit: 401(K) 2013)

Yet for all their interest in a social media savings message, 50% of young workers (compared to 39% of all workers) said one approach that would likely work is: “Stop trying to communicate. Instead, automatically enroll me with a high enough savings rate so I don’t have to think about it.’’ Of course if employers did ramp 401(k) withholding up to that level, young workers might be shocked at how much it reduced their take home pay and find it hard to save outside their retirement accounts—which takes you right back to the HelloWallet identified problem of workers lacking emergency funds and draining their retirement accounts. Plus, let’s not forget the student debt many young workers carry or the fact that if the AARP has its way, these kids will be paying through the nose for the baby boomers’ retirement, too. Bottom line: To stay on track for retirement, Gen Y is going to have to run a marathon.

All employees are looking for automatic, no decision, retirement plans. This includes automatically enrolled into an age appropriate portfolio. This makes your 401(k) plan more like a pension plan. This will reduce anxiety and improve results.

Please comment or call to discuss how to improve your company 401(k) plan.

There are discussions about making retirement plan deductions mandatory. I am not in favor of this, we should be more accountable for our own financial future. I am in favor of auto enrollment and auto escalation. I would also recommend that the employee be automatically put into an age appropraie portfolio. This makes the plan more like a pension plan. The employee could then decide to opt out of the plan or change the risk level of their portfolio. The end result, I believe, would be more people properly saving for retirement.
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“This research shows that employers are not getting the ROI that they may think they are from their retirement investments,” HelloWallet founder and CEO Matt Fellowes said in a statement. “Investing in retirement savings is essential for all Americans, but this study demonstrates that a large share of U.S. workers lack the basic financial skills needed to actually benefit from those savings, and it’s costing both them and their employer dearly.”The research also finds that only a small percentage of employees (8%) are withdrawing funds because they have lost their jobs. Instead, 75% of those who have made early withdrawals have done so because they lack basic money management skills and need to meet basic money management challenges, such as emergencies, credit card payments and health care. In many cases, better planning and guidance would put them on a track to avoid costly mistakes, take advantage of the tax incentives and accumulate the savings needed for retirement.

American companies now spend the aforementioned $118 billion annually on retirement contributions with the expectation that employees will take maximum advantage of these programs to improve their financial well-being. The new research suggests that employers’ massive investment is not always delivering the intended results.

There is evidence that the American workers needs more education on financial planning. Americans need to realize that they and they alone are accountable for their own financial future. Reliance on the government will only result in disappointment.

Please comment or call to discuss how this affects you and your employees.

When you build a globally diversified portfolio you will realize inflation adjusted income throughout retirement. Unlike with many pension plans that are not inflation adjusted. The drawback is you must live with the volatility, however with a prudent process you will do this without anxiety. During retirement inflation may be your greatest risk, not stock market volatility.
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Benefits can change midway through your career. One of the main advantages of a pension plan is that the income is guaranteed. Thus, you may be able to spend more than you could have otherwise because of how dependable the monthly checks will be. But as we’ve seen in recent years, benefits are being reduced with plan reforms. If you have been counting on guaranteed monthly payments and saved less through the years because of it, you’ll be affected even if the benefits are reduced slightly.Your pension could be eliminated if the employer files for bankruptcy. Private pension plans are protected by the Pension Benefit Guaranty Corporation (PBGC), so most employees will end up getting something even if an employer declares bankruptcy. But at that point, anything is possible because negotiations within the bankruptcy court could change benefits. Monthly benefits may be cut, or the accrual method may significantly change. Everything is on the table. The worst part is that you won’t know the outcome while everything is being resolved, which could takes months, if not years.

Benefits usually don’t extend beyond your lifetime. And even if they do, the income will only last through your spouse’s lifetime. This means that none of your heirs will be able to count on that income. The guaranteed income for life is a double-edged sword. On one hand, you won’t run out of income during your lifetime. But if you have enough money to sustain your lifestyle to begin with, you might want to invest on your own in hopes of leaving a bigger payout for your children.

Given the recent volatility in the equity markets many investors are looking for guarantees such as pension plans. Guarantees come with drawbacks as do all strategies. If you have a prudently designed portfolio you can effectively deal with any volatility with less anxiety.

Please comment or call to discuss how this affects you and your financial future.

The Wall Street bullies will promote actively traded funds whenever possible. Not because it will help you earn a better return but because they will earn trading fees. Since the 401(k) plan has become the sole source of retirement for most Americans it should be offered more like a pension fund. Each employees will be automatically enrolled in an age appropriate portfolio. From there the employee can change their risk level. Studies have proven that less choice will result in better performance.
Fiduciary Trust Building (Photo credit: ToastyKen)

The fiduciary duty of prudence requires plans and plan fiduciaries to always out the interests of the plan participants and their beneficiaries first. The duty of prudence consists of various responsibilities, including the duty to avoid unnecessary expenses and the duty to provide participants with a selection of investment options that allows them to minimize the risk of significant losses and “sufficient information to allow plan participants to make an informed decision.”I recently released a white paper on the Active Management Value Ratio, proprietary metric that allows investors and fiduciaries to analyze the cost efficiency of actively managed funds. The white paper clearly shows that a number of the leading mutual funds used by pension plans are not cost efficient, in some cases even reducing a plan participant’s return. It could be argued that such inefficiency could constitute a breach of fiduciary duty, clearly not a sign of a successful plan.

Plans and their fiduciaries are required to provide plan participants with a sufficient selection of investment options to reduce the risk of large losses and sufficient information to evaluate such investment options and make informed investment decisions. In short, in most cases this simply is not happening.

In most cases plans are primarily an assortment of expensive, highly correlated equity-based mutual funds that unnecessarily expose plans and plan fiduciaries to unlimited personal liability. Furthermore, in many cases plans fail to provide plan participants with all of the information they need to make informed decisions, resulting in liability exposure for both the plan and its fiduciaries.

Many plans and plan fiduciaries mistakenly believe that they do not face any personal liability by virtue of their mistaken belief that they have complied with ERISA Section 404(c). However, Fred Reish, one of the nation’s leading ERISA attorneys, has testified that over his twenty plus years of ERISA practice, he has never seen a plan properly comply with all of Section 404(c)’s requirements. Consequently, there are a lot of plans and plan fiduciaries that do not realize the risk exposure that they actually have.

Most investors believe that the Wall Street bullies can predict the future. The Wall Street bullies know investors make their investment decisions based on emotions and not logic. Investors need to control their emotions to succeed long term in reaching their financial goals. This can not be done on your own. You need to fire your broker and hire an investor coach.
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Most people in these plans have no idea how to manage them. That’s why your employer should help you. After all, there’s no point in providing employees with this benefit if you don’t help them get the most out of it. It’s like giving your son or daughter a car and never ensuring that they know how to drive safely. Most 401(k) accounts crash before reaching their destination.

The Pension Protection Act of 2006 allows plan sponsors to automatically enroll their employees in age appropriate managed portfolios. This single feature will improve performance results and reduce fiduciary risks. Making the 401(k) plan more like a pension plan will be very attractive to current and prospective employees.

Please comment or call to discuss how this affects you and your company.